Does This Pattern Suggest a Sharp Correction in Stocks?

In this article:

• Exploring the possible bubble conditions in the 'Magnificent Seven'.
• A closer look at Nvidia (NVDA) and Apple (AAPL).
• Comparing this situation to other extreme overvaluations.
• The recurring pattern that may present an opportunity.
• Potential trade opportunities for the yen.

Thoughts on the Market - February 11, 2024

Last week I noted that at some point I would be placing a large, limited-risk option bet to play for a massive downward correction in the Nasdaq due to its extreme overvaluation. The challenge of timing this play is not an easy one, and my analytical process to arrive at that decision is complicated. The decision is all the more complicated, however, when it comes to analyzing bubbles, as they can persist longer than we can rationally expect and extend to levels way beyond what we may have thought were sensible. In the immortal words of the great economist, John Maynard Keynes, “Markets can remain irrational longer than you can remain solvent.”

The higher the stock markets goes, the more interesting I find it from a valuation perspective. The market continued its rally last week, adding another 3% to its recent gains, and this type of market action simply gets me even more focused on the coming opportunity. The bubble conditions keep expanding and the valuations keep getting more strained. The supermajority of the gains over the past thirteen months have come from the massive returns of the Magnificent Seven. I will address this shortly, but first I want to point out my mixed views regarding this bubble.